ASFRMA: Market volatility drives demand for variable cash rents

“We currently estimate that 30 percent to 40 percent of farmland cash rent agreements now use variable leases. Operators and landowners are finding this option is the best scenario for achieving results.”

It is amazing how much difference a year can make in agriculture. At the end of 2012, we were going into the winter months emerging from a record-breaking drought and reduced yields that led to record high commodity prices. Along with the reduced yields, we had excellent risk management coverage that provided extra income to landowners helping to produce record income. This record income in combination with aggressive farm operators did allow for very good farm rental demand.

The year started out with good moisture that delayed spring planting in most areas. The mid-summer months were hot and dry. In August and September, rain fell in most areas and the heat cooled down. Once harvest started this fall, we saw record yields for corn and soybean that translated into lower commodity prices.

With the commodity price reductions, producers are working on cropping budgets that aren’t near as rosy as past years. This reflects upon cash rent values in the area and producers are looking at lower rental rates in some cases. We in the farm management business are working hard for our clients coming up with ways to allow our owners to be protected in case prices rally.

Farmland owners are struggling to determine fair yet profitable cash rent levels for their operations as they move into 2014. Variable rate cash rents that provide market performance flexibility have become more prevalent due to fluctuations in commodity prices.

We currently estimate that 30 percent to 40 percent of farmland cash rent agreements now use variable leases. Operators and landowners are finding this option is the best scenario for achieving results.

It has been a challenge for most landowners to determine fair rent levels within the current market. Conditions have changed so rapidly over the last couple of years that many landowners find themselves 20 percent to 40 percent below market on current lease terms with no real idea what the lease terms should be for 2014 and beyond.

Contrary to last year, the market is anticipating a possible decline in crop prices for the fall. Farm operators want to have some remediation for high cash rents in the event of a crop failure or dropping commodity prices. Variable rate cash rents have now become very popular allowing the farm operator and the landowner to arrive at a base rent and factor in a plus rent arrangement if things go very well.

Flexible leases are of benefit to both the landowner and farm operator as they provide the ability to adjust and react to the market. It provides a fair platform that benefits both sides, making the most of any volatility.

Landowners often rely on the farm operator to help determine a fair rent and even what type of rental arrangement to use. Landowners now have a wider range of choices to consider when they formulate how to best manage their income-producing asset.

Reviewing a lease has never been more important, especially with the income that farms can generate today. Landowners we work with ask us for advice on the optimum lease option for their situations. They want to know what is fair for land in their area as well as the impact land values might have.